Buying a vacation home is a lifelong goal for many people and a hefty financial obligation.
To get the most out of your investment, it’s important to understand the risks and responsibilities.
What's in this article?
In this article, we’ll explore the major considerations you should make before buying a vacation home, including the costs, location and ongoing obligations.
Buying a vacation home: Are you financially ready?
Financial readiness is the number 1 consideration before buying a vacation home.
Readiness means:
- Understanding the full costs of ownership
- Evaluating your current financial health
Let’s break down these factors in more detail.
What are the full costs of buying a vacation home?
Buying a vacation home involves more than the purchase price.
Prepare for the following expenses:
- Monthly mortgage payments
- Property taxes
- Homeowners insurance
- Maintenance costs
- Utilities
- Homeowners association fees
Buyers must also prepare for the down payment amount in addition to the closing costs and fees, ranging from 2% to 5% of the loan amount.
Are you in good financial health?
The most important considerations for your financial health include:
- Debt-to-income ratio (DTI): Compares your total monthly debt payments to your gross monthly income
- Credit score: Affects your ability to attain favorable mortgage terms and conditions
- Emergency savings: Equals at least three to six months of living expenses according to experts
The experts at Compass Mortgage can help you determine whether you qualify for a loan and, if not, what you need to improve to qualify.
Ready To Take Your Next Step?
Determine your goals for the property
Are you planning to use your vacation property for personal benefit, rental income or a mix of both?
Your goals for the property influence your mortgage options, property features, tax implications and exit strategy.
How your goals influence your financing options
- Personal use: If you intend to use the vacation home for personal enjoyment, you’ll get a second mortgage, a conventional loan specifically for second homes or a home equity loan if you have sufficient equity in your current home.
- Rentals: If your property will primarily be for rental income, you may need to apply for an investment property loan.
- Mixed-use: Depending on how often you use it for personal reasons or for rental, you may qualify for a second mortgage or investment loan.
Aligning your goals with your property features and exit strategy
For some, a vacation home is meant to remain in the family indefinitely and could someday become a retirement home or eventually pass down to heirs.
For others, the property may be sold at a profit after it appreciates.
Your short-term and long-term property goals influence your financing options, property features and amenities.
Location, location, location: How to pick your destination
Your property’s location is important for your personal enjoyment and the property’s long-term value.
When choosing a location, think about the following factors.
Proximity to your home
Do you need a vacation home within driving distance for quick weekend trips, or are you looking for an attractive destination that you want to visit regularly?
Consider the costs of travel and whether your vacation property must be easily accessible or can be more remote.
Climate
Do you want a summer retreat or a wintry escape?
Research the area’s climate and consider whether it’s prone to extreme weather and potentially inaccessible during certain times of the year.
Nearby attractions
Consider what you, your guests or potential renters would find appealing, including beaches, lakes, hiking trails, ski resorts or golf courses.
You may also want to choose a location close to shopping, restaurants or health care.
Natural disasters and the cost of living
Some of the most beautiful locations also come with significant risks in the form of hurricanes, floods, earthquakes or other natural disasters.
These risks can impact your insurance premiums and maintenance costs.
Additionally, consider the costs of insurance, utilities and property taxes, which can be more expensive in certain areas than others.
Future development
The potential for future development or decline can be out of one’s control, but certain indicators reveal whether an area is poised for growth or losing its population.
Work closely with local real estate professionals and investors for insights into the growth of a prospective location.
The ongoing responsibilities of ownership
Remember, unlike an all-inclusive resort or short-term vacation rental, you are in charge of the maintenance and upkeep of your vacation home unless you hire a property manager.
Assuming you intend to maintain the property yourself, keep in mind the following ongoing responsibilities:
- Lawn care and landscaping
- HVAC system upkeep
- Exterior cleaning
- Appliance maintenance
- Winterization or hurricane preparedness (if applicable)
- Unexpected repairs or replacements
- Routine upgrades or improvements
Develop a plan for handling these responsibilities tailored to how often you plan to visit the property and how you intend to use it.
Your potential return on investment (ROI)
If you expect to use your vacation home as a short-term rental or to sell the property at some point in the future, consider your potential ROI.
Vacation homes in popular locations will often appreciate over time, depending on the following factors:
- Local property value trends
- New infrastructure or developments
- Properties in limited supply areas
- Property upgrades and improvements
Don’t forget to think about the “intangible” benefits of your vacation home, such as the years of family memories and the boost to your quality of life.
Pros and cons of buying a vacation home
Owning a vacation home can be a dream come true as long as you carefully weigh the potential risks with the benefits.
Here’s a quick list of the pros and cons of buying a vacation home to help you determine the right time to move forward.
Pros of buying a vacation home
- Save money on vacations
- Rent it out to offset the costs or earn a profit
- Gain a personal retreat
- Access potential tax benefits
- Pass down the home to your children
Cons of buying a vacation home
- Ongoing expenses
- Regular maintenance
- No guarantee of appreciation
You don’t have to make this decision alone. The experienced loan officers at Compass Mortgage can look at your current scenario and provide personalized loan solutions.
Get Committed®: Apply for your vacation home financing
Ready to Get Committed® to your vacation home dreams? Get a fully vetted loan commitment from Compass Mortgage that locks in your rate and helps you compete with even the most compelling offers.
You have more control over the mortgage process than you realize—and it all starts with the right mortgage lender.